ITAT Ahmedabad: Hedging Loss on Raw Materials is Business Loss u/s 43(5)(a); Balance Additional Depreciation u/s 32(1)(iia) Allowable Next Year - 2025-06-24

ITAT Ahmedabad Grants Major Relief to N.K. Proteins ; Clarifies Stance on Hedging Losses and Additional Depreciation

Ahmedabad : The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, comprising Dr. B.R.R. Kumar, Vice-President, and Shri T.R. Senthil Kumar , Judicial Member, has delivered a significant order, largely favoring N.K. Proteins Pvt. Ltd. in its appeals against the Income Tax Department for the Assessment Year 2012-13. The Tribunal allowed the assessee's appeal (ITA No. 464/Ahd/2022) in full and partly allowed the Revenue's appeal (ITA No. 546/Ahd/2022).

Case Background

N.K. Proteins Pvt. Ltd., a manufacturer of edible and non-edible oil products, had declared an income of Rs. 14.79 crore for AY 2012-13. However, following a Special Audit under Section 142(2A) of the Income-tax Act, 1961, the Assessing Officer (AO) reassessed the income at a substantially higher Rs. 103.02 crore, making several additions and disallowances. The Commissioner of Income-tax (Appeals) [CIT(A)] provided partial relief, leading both N.K. Proteins and the Revenue to approach the ITAT.

Key Rulings in Assessee's Appeal (ITA 464/Ahd/2022)

The ITAT overturned several additions confirmed by the CIT(A), providing substantial relief to N.K. Proteins .

1. Disallowance of Rs. 1 Crore Loss on Cotton Wash Oil (CWO) Trading: The AO, based on a Special Auditor's report, had disallowed a Rs. 1 crore loss from CWO trading with a group concern, Tirupati Proteins Pvt. Ltd. (TPPL), alleging it to be a paper/fictitious transaction, possibly linked to NSEL financing. The CIT(A) upheld the disallowance, noting a one-day gap between purchase and sale and lack of delivery challans, despite accepting the transactions were not on the NSEL platform.

The ITAT allowed the assessee's appeal, noting:

"The Ld. CIT(A) , however, has made the addition only on the basis of the observation that no delivery challans had been submitted by the assessee to substantiate the delivery of such goods within a short time of 1 day... The addition made by the Assessing Officer solely on the basis that that the transactions are with Tirupati Proteins Pvt Limited and hence the losses cannot be allowed is not an acceptable proposition." The Tribunal found that since the transactions themselves (off NSEL) were not fundamentally questioned by the CIT(A), disallowing the resultant loss merely due to the group-company nature or absence of challans for a quick turnaround was not justified.

2. Disallowance of Rs. 4.20 Crore Hedging Loss (F&O): A loss of Rs. 4,20,57,547 from Future & Option (F&O) commodity transactions, claimed as a hedging loss, was treated as speculative by the AO and CIT(A). The CIT(A) reasoned that the assessee failed to provide existing contracts for the supply of finished goods to correlate with the raw material hedging.

The ITAT sided with the assessee, ruling the loss as a business loss under Section 43(5)(a) of the Act. It observed that N.K. Proteins , as a manufacturer using these commodities as raw materials, implicitly engages in sales of manufactured goods under contracts for actual delivery. The Tribunal stated:

"The provisions of said Act are squarely applicable to the facts of the instant case, hence the same cannot be treated as speculative transaction."

3. Addition of Rs. 1.05 Crore Prior Period Income: The AO added Rs. 1,05,89,848 as prior period income, which the assessee claimed had already been offered to tax in AY 2011-12. The CIT(A) confirmed the addition, noting no revised return was filed for AY 2011-12.

The ITAT allowed this ground, directing the AO to verify the facts. The Tribunal noted that details were in Form 3CD and tax was paid via challan (reflected in Form 26AS) based on a revised computation for AY 2011-12. A minor discrepancy in the amount offered was noted as corrected.

4. Disallowance of Interest Rs. 4.88 Lakhs (WIP Capitalization): The ITAT allowed this ground "for statistical purposes," stating that depreciation shall be allowed on the capitalization of interest.

Rulings in Revenue's Appeal (ITA 546/Ahd/2022)

The Revenue's appeal met with mixed success.

1. Deletion of Rs. 80.51 Crore Addition (CWO & Mustard Seed Purchases via NSEL): The AO had added Rs. 80.51 crore, alleging non-substantiation of payments for CWO and Mustard Seed purchases made through the NSEL platform. The CIT(A) deleted this addition, relying on confirmations from NSEL about the transactions and payments, and noting that the AO in the remand report did not dispute these facts and that delivery of goods was not contested.

The ITAT upheld the CIT(A)'s decision, dismissing the Revenue's appeal on this ground. The Tribunal emphasized:

"Based upon such report of NSEL, the Assessing Officer, vide letter dated 31st January, 2018 has given Remand Report wherein he has stated that NSEL has confirmed the transactions of CWO and mustard seeds and payment was made from NKPL-NSEL Settlement Account... Thus, from the reading of the remand report and the reply of NSEL, it is proved beyond doubt that the payments have been indeed made."

2. Deletion of Disallowance of Rs. 1.27 Crore Additional Depreciation: The AO had disallowed the balance 50% of additional depreciation (under Sec 32(1)(iia)) in the succeeding year for assets put to use for less than 180 days in the preceding year. The CIT(A) allowed the claim.

The ITAT dismissed the Revenue's appeal, following precedents including Godrej Industries Ltd (Bombay HC) and Rittal India Pvt. Ltd. (Karnataka HC). The Tribunal reiterated that the third proviso to Section 32(1)(ii) (inserted later) is clarificatory and permits claiming the balance 50% additional depreciation in the immediately succeeding previous year. It cited the Madras High Court in Shri T.P. Textiles Pvt. Ltd. :

"The Madras High Court in Shri T.P. Textiles Pvt. Ltd. , (supra) ruled that such proviso being clarificatory in nature, would apply to pending cases, covering past period also."

3. Disallowance of Interest Expenses (Rs. 4.24 Lakhs & Rs. 61,677 u/s 36(1)(iii)): The ITAT allowed the Revenue's appeal on these two grounds concerning minor interest disallowances, as the assessee stated they would not contest these due to the small quantum involved.

Final Decision and Implications

The Tribunal pronounced its order on June 23, 2025, allowing the assessee's appeal entirely and partly allowing the Revenue's appeal. This decision provides significant monetary relief to N.K. Proteins Pvt. Ltd. and offers important clarifications on the treatment of hedging losses for manufacturers, the allowability of balance additional depreciation, and the evidentiary weight of confirmations from entities like NSEL, especially when corroborated during remand proceedings. The judgment underscores the necessity for thorough verification and consistent application of legal principles in tax assessments.